Plenty of bears remain skeptical about the U.S. market\u2019s stellar rally since October 2022.\u00a0One reason for their gloom is they\u2019re overlooking an economic elixir on the horizon that will help fix inflation and boost profit growth. That secret ingredient is productivty, and we are about to see a boom in it.\u00a0<\/p>\n
The boom is key to understanding why you should consider staying in stocks and adding on weakness.<\/p>\n
First, a quick primer. Labor productivity is output per hours worked. Productivity growth happens when output increases more than hours worked. It\u2019s natural to think this happens because people work harder. But that has little to do with it.\u00a0<\/p>\n
Instead, productivity goes up when companies invest more in technology and equipment that make it easier for workers to produce more. That investment is happening now in a big way, which is how we know productivity is about to rise by a lot. This will make all the difference for growth, earnings and stocks.\u00a0<\/p>\n
\u201cProductivity improvement could usher in the next phase of earnings growth,\u201d says Bank of America strategist Savita Subramanian. That\u2019s because it boosts profit margins. The other big benefit is it puts downward pressure on inflation. When productivity rises, companies feel less pressure to pass on increases in their own costs. This cools inflation, and it will ease worries the Fed will hike the economy into a recession.\u00a0<\/p>\n
Here are the four main reasons why a productivity boom is on the way, and 14 stocks that will benefit.\u00a0<\/p>\n
1. AI boom:<\/strong> Whenever a new technology arrives, it\u2019s tough to see through the hype. But generative AI seems like more than hype. Almost half of companies surveyed by CNBC recently say that AI is their top priority for tech spending over the next year. AI budgets are more than double the second-biggest tech spending area, cloud computing. It is no mystery why. AI has the power to do a lot of things more efficiently than people \u2014 like routine research, writing and code writing. So, AI will boost productivity.\u00a0<\/p>\n A straightforward way to invest in AI is to own shares of Nvidia AI-linked demand drove the huge increase in second quarter sales projections to $11 billion in sales vs. the $7.2 billion analysts had penciled in. Bank of America reiterated its \u201cbuy\u201d rating after the stock popped on robust first quarter earnings, and upped its price target to $450 from $340. Goldman Sachs reiterated its buy rating on July 10, and raised its price target to $495 from $440.<\/p>\n AI also helps code writers handle the more routing parts of their jobs. This will help Accenture 2. Wage inflation:<\/strong> U.S. manufacturing wages rose 4.9% year-over-year in May, and are up 19% from pre-COVID levels. This is going to drive up productivity. Wage inflation typically induces companies spend more on tech and new equipment to boost efficiency. Historically, productivity has increased two years after wage inflation.\u00a0Companies are talking more often about automation. This confirms they are putting money into it. In short, a real capital spending or \u201ccapex\u201d cycle is here.<\/p>\n 3. A new capex cycle:<\/strong> U.S. capex spending was up 14% year over year in the first quarter, following 18% gains in the prior quarter. Companies have announced $600 billion in large projects since the start of 2021, triple the normal amount, notes Bank of America.\u00a0This follows a decade of underinvestment. The upshot: Technology and equipment are old, so the burst in spending is going to have a big impact.\u00a0<\/p>\n Besides the pressure to offset wage growth, companies are spending more to \u201cre-shore\u201d manufacturing because of the recent supply chain debacles, and the growing geopolitical tensions with China.\u00a0 U.S. companies are also motivated by incentives to build domestic factories in the CHIPS and Science Act, the Inflation Reduction Act, and the Infrastructure Investment and Jobs Act, notes Ed Yardeni of Yardeni Research.\u00a0<\/p>\n \u201cIf the US manages to skirt a recession, it will be due in good part to the massive capital spending and building related to these plants,\u201d Yardeni says. He notes that nonresidential construction is booming, particularly factories. It rose to a record $189 billion in April (annualized and adjusted for seasonality). That is a 152% increase over the past twenty-four months, as this chart shows.\u00a0<\/p>\n The obvious go-to group here is companies that provide automation equipment. They are already reporting the highest revenue growth rates since 2011. Sales at these companies are 35% above pre-COVID levels, notes Bank of America analyst Andrew Obin. Obin singles out Emerson Electric
\n NVDA,
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\n because it makes some of the most widely used chips in the space. Yes, Nvidia shares are up a lot and look pricey. But game-changing tech companies always look expensive until they grow into their expensive valuations. That\u2019s happening with Nvidia.\u00a0<\/p>\n
\n ACN,
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\n develop apps for customers, one reason why Bank of America analyst Jason Kupferberg favors the stock.\u00a0And since AI helps companies collect and process data faster, it stands to help boost profits at Thomson Reuters
\n TRI,
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\n which has been investing heavily in AI, says B of A\u2019s Heather Balsky.\u00a0<\/p>\nCapex cycle stock plays<\/strong><\/h2>\n
\n EMR,
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\n and Fortive
\n FTV,
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\n Others to consider include Rockwell Automation
\n ROK,
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\n Honeywell International
\n HON,
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\n and\u00a0Schneider Electric
\n SBGSY,
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\n \u00a0<\/p>\n